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Taking a random sampling of 2Q GDP forecasts for Bloomberg we can see the uncertainty facing the release schedule for 7/30. Weaker than expected trade and and inventory data are the primary culprits behind the uncertainty, and I imagine more banks will revise down their forecasts as we move closer to the release. Presently, I believe the market will be lucky to see the q/q annualized growth rate exceed 3.0%, and anticipate the release will come in closer to 2.7%.

U.S. employees old enough to retire are outnumbering their teenage counterparts for the first time since at least 1948 when Harry Truman was president, a sign of how generations are now having to compete for jobs.

In a sign of China’s slowing economy passenger car sales in the country grew at the slowest pace in 15 months, moving off historic highs stoked by the country’s unprecedented fiscal stimulus. As the attached chart highlights, the spike in car sales was highly correlated to strong consumer lending growth catalyzed by the government’s stimulus package—bad news for the sector, and expectations of Chinese economic growth exceeding 10%. The Chinese government has already started, and is expected to accelerate, implementing tighter fiscal and monetary policies, which will have an adverse impact on new lending, auto sales, and general economic growth.

As everyone is aware—excluding possibly the IMF— the Chinese government has begun tapping the brakes on the country’s economic engine to prevent overheating and curtail inflationary fears. With this in mind, the IMF surprised quite a few people yesterday increasing their 2010 growth forecast for China to 10.5% y/y from 10.0% in April; well above the current Bloomberg consensus forecast of 10.1%, which I believe holds more downside than upside risk. Even more surprising was a downward revision to its 2011 forecast to 9.6% from 9.9%, which is likely also too optimistic, especially compared to the 9.25% Bloomberg consensus forecast. The IMF seems to be underestimating the impact of government restrictions in the country’s real estate sector, the effect of European austerity on the country’s exports, and various other domestic lending restrictions. Highlighting the downside risk facing the Chinese economy both this year and next, the government’s chief statistician was recently quoted as saying, “In a complex and changing world economic environment, domestic economic conditions are getting more uncertain and complex.” The lesson here is don’t be surprised to see some disappointing numbers from China over the months ahead. Keep your eye on the country’s weakening Purchasing Manager Indices, for clues toward future growth.

Many investors hoped a modest decline and a leveling off in mortgage delinquencies the end of last year signaled a top for the index, but those hopes were dashed when delinquencies for all types of mortgage hit a new high during the first quarter. Fears were further exacerbated yesterday when Lender Processing Services released their ‘Mortgage Monitor’ for May, which showed a 2.3% increase in total delinquencies, indicating the first quarter’s sharp rise may not have been a one off event. Even more worrisome is the fact the according to LPS the amount of mortgages delinquent by 0 to 30 days rose 10% after showing some improvement during the first quarter. According to the Mortgage Bankers Association (MBA) the national delinquency rate presently stands at 10.1%. The rate for prime mortgages is 7.3%, and for subprime 27.2%, all of which rose during the first quarter. Rising delinquency rates—likely due to significant under employment—means foreclosures will be a lingering issue well into the future.

Source: MBA

As an aside, it has been suggested that up to 31% of total foreclosures are actually strategic defaults, where buyers are underwater on their mortgages and essentially give up their homes to their lenders rather than paying off the mortgage now valued more than their home. Surprisingly this could actually have a somewhat positive impact on the economy, although not the lenders, as it frees up cash flow for the borrower to consume other products—personal consumption is the largest component of U.S. GDP growth.

Recently I’ve come across several headlines comparing recent activity in the stock market to what occurred during the Great Depression, so I ran the numbers. The attached chart tracks the S&P 500 20 months prior (t-20) to its respective high prior to the Great Depression and the recent recession; ‘t’ indicates the actual high. You can then compare the performance of the SPX during both downturns on a monthly basis (t+1, t+2, etc…) from the highs. I am no technical strategist, but other than the initial fall I fail to see any similarities between now and then. During the Great Depression the S&P lost nearly 90% of its value over 34 months; the S&P is presently 33 weeks off of its high and is down only 34%, and even at the lowest level was down only 53%. Surprisingly, it took the SPX until the early 1950’s following the Great Depression to recoup the losses the SPX has already regained since the start of the recent recession. The bottom line is a more responsive central bank and coordinated government actions may have helped us escape the full pain of the 1920s, but we still have a long steep hill to climb before we move away from the danger zone. Let’s not forget the effects from reversing fiscal stimulus and unprecedented monetary policy responses—that helped stave off deeper loses—are still unknown and could eventually weigh down the markets.

Historically, payroll growth rarely exceeds 400K in any given month, even in the best of times, not good news considering the US has lost 8mn jobs since the start of the recession. Some analysts have discussed a best case scenario where payrolls rise by 1mn a month, bringing us back to the pre-recession peak within eight months, however, in reality this is a near impossibility. Since 1939 there has been only one instance of monthly job growth above the million mark, and as it turns out that stellar number was caused by 700,000 AT&T workers returning from a 22 day strike–meaning far fewer than 1mn jobs were in reality created. In a much more likely scenario where payroll growth averages 200K a month it would take over three years to return to the pre-recession peak; this figure doesn’t even count population growth that has taken place during that period. The attached chart breaks down the frequency of monthly payroll gains and losses from 1939 to now, and certainly doesn’t paint a rosy picture for the labor market.

Contact Me:

Michael.McDonough@fiateconomics.com
Michael is an economist/strategist who has worked from Wall Street to Hong Kong primarily focusing on the U.S. and emerging markets. He has also written several columns. More

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